Currency Trading Margin
The general sucess of the FOREX marketplace is made feasible these days because of margin. With out this essential principle, the typical investor would not have the ability to participate in FOREX at all.
Trading On A Margin
In order to trade on a margin, you must set up a margin account. With a fairly little deposit you are can begin trading big amounts of currency. Establishing a margin account with a FOREX broker enables you to borrow money from the broker to control currency lots that are usually worth $100,000. The quantity of borrowing power your margin account provides you is the leverage. 100 – 1 means that with a single dollar you can control $100 worth of currency.
The Benefits Of Margin Trading
Your potential for more earnings exists with exponential buying power. FOREX currencies are traded in much smaller units than cash. The American dollar, for instance, is traded in units down to 4 decimal places. Instead of $1.32 FOREX quotes are noticed as $1.3256. The smallest unit in FOREX currencies is called the pip. Even a small change from 1.3256 to 1.3356 represents a distinction of $100.
As you might be able to extrapolate, you will be able to control $100,000 with just a $1,000 investment. Obviously, you are borrowing money from the broker in order to do that, and any slip ups can wind up costing you bigtime. The potential exists for the trader to loose more than his original deposit. Generally brokers will terminate a transaction that extends beyond the margin deposit.
You have to be extremely careful when working on a 1% margin account. A currency change in even a penny can lose your entire $1,000 investment, but when the opposite is true you can stand to make $10,000 dollars from one penny.
Limit Your Losses
To limit your losses, you might want to set up a stop loss order. Stop loss orders automatically close your position when the value of the currency crosses a pre-determined point. One risk that is frequently overlooked is your broker closing your account on you. This can be potentially disasterous if the currency you invested in suddenly rises in price and also you are unable to sell.